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Don’t Raise CAFE Standards

Everybody in Washington wants to force the auto industry to make more fuel-efficient cars and trucks. President Bush wants to require new vehicles to meet federal standards (to be determined) based on how heavy they are. The Senate wants to mandate that every car, pick-up truck, and SUV sold in 2020 average a fuel efficiency of at least 35 miles per gallon — far more aggressive than the 27.5 mile per gallon standard now in place for passenger vehicles. The House could offer an amendment on fuel standards from the floor on Friday. Either way, we’ll find out later this week what’s in store.

Would the market produce “too little” conservation without corporate average fuel efficiency (CAFE) standards? At first glance, no. The “right” (that is, efficient) amount of gasoline consumption will occur naturally as long as fuel markets are free and gasoline prices reflect total costs. In fact, a review of market data by Clemson University economist Molly Espey and Santosh Nair found that consumers actually overvalue fuel efficiency. That is, they pay more up front in higher car prices than the present value of the fuel savings over the lifetimes of the cars.

But driving imposes costs on others that aren’t reflected in fuel prices, like environmental degradation. Because gasoline prices do not reflect total costs, consumption is higher than it ought to be. Congress is therefore doing the economy a favor by mandating increased increments of energy conservation, right?

The argument is clever, but wrong.

Increasing CAFE standards will not decrease the amount of pollution coming from the U.S. auto fleet. That’s because we regulate emissions per mile traveled, not per gallon of gasoline burned. Improvements in fuel efficiency reduce the cost of driving and thus increase vehicle miles traveled. Moreover, automakers have an incentive to offset the costs associated with improving fuel efficiency by spending less complying with federal pollution standards with which they currently over-comply.

Those two observations explain calculations from Pennsylvania State economist Andrew Kleit showing that a 50 percent increase in CAFE standards would increase total emissions of volatile organic compounds by 2.3 percent, nitrogen oxide emissions by 3.8 percent, and carbon-monoxide emissions by 5 percent.

Another rationale for CAFE standards is that gasoline purchases send money to foreign terrorists who kill and maim with our dollars. Energy conservation, according to many, is our “ace in the hole” against al Qaeda and its ilk.

If there were a relationship between our “energy addiction” and Islamic terrorism, one would expect to find a correlation between world crude oil prices and Islamic terror attacks or mortality from the same. But there is no statistical relationship between the two. Terrorism is a very low-cost endeavor and manpower, not money, is its necessary determinant. That explains why even the lowest inflation-adjusted oil prices in history proved no obstacle to the rise of Islamic terror organizations in the 1990s.

While it’s true that nasty regimes like Iran are getting rich off our driving habits, the extent to which oil profits fuel its nastiness is unclear. After all, Pakistan is a poor country with no oil revenues, but it had no problem building a nuclear arsenal. The same goes for North Korea. Iran without oil revenues might look like Syria. Venezuela without oil revenues might look like Cuba. In short, while rich bad actors are probably more dangerous than poor ones, oil revenues don’t seem to make much difference at the margin.

Finally, we’re told that CAFE helps secure our energy independence. But the amount of oil we import is related to the difference between domestic and foreign crude oil prices. Reducing oil demand may reduce the total amount of oil we consume, but it will not reduce the degree to which we rely on foreign oil to meet our needs.

Regardless, tightening CAFE standards would have little impact on any of these alleged problems. If the Senate’s proposed CAFE standard of 35 mpg by 2020 were to become law, it would reduce oil consumption by, at most, about 1.2 million barrels a day. Given that the Energy Information Administration thinks world crude oil production would be 103.8 million barrels a day by 2020, the reduction would be 1.2 percent of global demand and result in a 1.3 percent decline in price; nowhere near enough to defund terrorists, denude oil producers of wealth, or secure energy independence.

Congress has no business dictating automotive fuel efficiency. That’s a job for consumers, not vote-hustling politicians. There are no problems for CAFE standards to solve. Hence, they shouldn’t be tightened; they should be repealed.